Commercial Loans Blog

Land Loans and How To Find The Best One

Posted by George Blackburne on Sun, Dec 13, 2015

Raw_Land.jpgWho makes land loans today?  Where is the best place to find a good land loan?  Will you or your borrower qualify for a land loan?  How large of a land loan can you get?  Today we answer these questions, as well as discuss inadequately capitalized developers.

In the years leading up to the Great Recession, real estate developers were making a fortune  developing raw land.  They would buy farmland or scrub land, get it re-zoned, complete the horizontal improvements, and then quickly sell off the individual home-site lots for a small fortune to home builders.  Horizontal improvements are defined as grading the property, bringing utilities to each lot, and putting in streets, sidewalks, curbs, and gutters.

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At the time, commercial banks were making lots and lots of land loans and A&D loans.  An A&D loan is defined as an acquisition and development loan structured like a construction loan, where the construction budget includes the purchase price of the raw land, the hard costs of the horizontal improvements, the soft costs - including an interest reserve and sales commissions, and a contingency reserve of around 5% of hard and soft costs.




During the bubble in real estate prices leading up to the Great Recession, commercial banks were drinking the Kool-Aid and making A&D loans up to 70% of Total Cost.  Sometimes commercial banks were even going as high as 80% of Total Cost!  Insane.  No wonder there was a bubble.

You can guess how this story turned out.  The Great Recession destroyed the housing market, and land prices plummeted.  The banks foreclosed, the banks took huge loss, and Federal banking regulators slapped the snot out the banking industry for being so stupid.  Truly folks, the losses in land development lending were often 80% to 90%.

Why do we care?  Regulators have a long memory, and the absolute last loan that banking regulators want commercial banks to make today are land loans.  Therefore, unless a developer is as rich as Donald Trump and has a banking history with a particular local bank going back for 15 years, he is probably NOT going to be able to get a land loan or a land development loan from a commercial bank.




So who is making land loans today?  Answer:  Hard money lenders, like Blackburne & Sons.  Hard money lenders are true capitalists.  We'll make hard money loans, even when blood is running in the streets.  In fact, Blackburne & Sons was in the market making commercial loans every day of the Great Recession.


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But you don't have to apply strictly to Blackburne & Sons.  On there are at least 75 different commercial and land loan hard money lenders.  You fill out one short mini-app, check off six suggested lenders, and then press, "Submit."


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Will you qualify for a land loan?  How large of a land loan will you be able to get?  During an average market, hard money lenders will typically only advance up to around 40% loan-to-value on raw land.  In a rising market like today, Blackburne & Sons, for example, is pretty bullish on land loans.  We'll lend up to 50% loan-to-value on land to a good-credit borrower, and perhaps up to 60% of the land purchase price on a land development deal to a well-capitalized, experienced, and good-credit borrower. We're probably not unique among hard money lenders in terms of our bullishness on land today (12/13/15).

Now we FINALLY get to the point of today's training article.  I would like my own executives and loan officers (Ed!!) to pay special attention to the point that I am about to make.  We at Blackburne & Sons often see developers applying for a land.  They want a loan of 50% loan-to-value, and their exit strategy is to pay us off with a construction loan.

But wait a minute.  In my last blog article I pointed out that real estate developers are usually required to cover at least 20% of the Total Cost of the project.  They usually do this by bringing the land to the closing table (almost) free and clear.  If a developer has a big mortgage on his land, he won't be able to bring the land to the closing table free and clear.  He will never qualify for a construction loan to pay off his ballooning land loan!

Now, of course, if the developer has a BIG net worth, he can sell off some property to come up with the equity required by the construction lender.  Many developers also have a stable of passive investors who invest the equity in their deals in return for a share of the profits.  Other developers are very experienced at issuing private placements in order to raise their required equity.

But absent one of these three potential sources of equity, the land loan underwriter needs to be very careful about making a big land loan to a developer who claims that his exit strategy is a construction loan.  In order to qualify for a construction loan, most developers are supposed to bring the land to the construction loan closing table pretty much free and clear.

Do you enjoy my down to earth style of instruction?  Now is the time to become a commercial mortgage broker.  More commercial loans are ballooning in the next 12 months than in any similar period in history.


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Keep looking for a business card from a banker making commercial loans.  We'll trade you a list of 2,000 commercial lenders for the contents of that one business card.  We solicit these bankers to refer their turndowns to


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Have you registered on yet?  I am just talking about inputting your name, company, address, etc.  If you are pre-registered, you are far more likely to enter your next commercial loan into  If you pre-register, we'll give you a free $199 commercial mortgage underwriting manual.


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Topics: Land loans

Commercial Construction Lenders Require Equity From the Developer

Posted by George Blackburne on Sat, Dec 12, 2015

Apartment_Construction.jpgDevelopers, now is the time to apply for a commercial construction loan.  Mortgage brokers, now is the time to resume brokering commercial construction loans.  The economy is pretty healthy, and commercial banks are hungry to put their $2.7 trillion in excess reserves to work.  By the way, if you want a commercial construction loan, you will want to apply to a commercial bank, rather than to a mortgage company.  Commercial banks make 98% of all commercial construction loans.  However, developers, you need to have some skin in the game.

One of my commercial construction loan officers called me yesterday.  He had a developer who is building a $33 million apartment building in Florida.  The developer is buying the land for $2.7 million, and he has a term sheet for a purchase money first mortgage for $1.7 million.  He wanted a second mortgage on his purchase of the land for $800,000.  Who out there immediately spotted this as a goofy loan request?

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term sheet is defined as a loan proposal or conditional commitment letter (same thing) from a commercial real estate lender.  Appraisals and toxic reports are so expensive in commercial real estate finance that borrowers want at least a moral commitment from the bank before shelling out $4,500 to $8,000 for these third party reports.  A term sheet is legally worthless, but in real ife it means that the borrower is probably going to get the loan at the proposed terms, as long as the third party reports come back okay.




Now back to my story.  Why was this a goofy loan request?  Answer:

  1. No one makes second mortgages on land (other than sellers carrying back part of the purchase price).

  2. The bank is going to insist that the developer contribute at least 20% of the total cost of the project.  Normally - but not always - this means that the developer has to bring the land to closing table (almost) free and clear.  More on this below.


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Before we go any further, let's define a few terms.  The Total Cost of a commercial construction project is defined as the sum of the land costs, the hard costs, the soft costs, and the contingency reserve (normally equal to 5% of hard and soft costs).

Total Cost = Land Cost + Hard Costs + Soft Costs + Contingency Reserve

The Loan-to-Cost Ratio is the most important ratio in commercial construction loan underwriting.  The Loan-to-Cost Ratio is defined as the Construction Loan Amount divided by the Total Cost, times 100%.


Loan-to-Cost Ratio = (Construction Loan Amount / Total Cost) x 100%




Example:  Let's suppose a developer wants to build a three-unit industrial center in Austin, Texas.  He needs a $3.2 million construction loan, and his total cost is $3.8 million.  What is his Loan-To-Cost Ratio?

Loan-to-Cost Ratio = ($3,200,000 / $3,800,000) x 100% = 84.2%

This ratio is too high.  Unless the developer can raise more equity, the loan will be turned down.

For most commercial construction lenders, the Loan-to-Cost Ratio must not exceed 80.0%.  In other words, the developer must cover at least 20% of the Total Cost of the project.  This kind of makes sense.  The bank doesn't want to take all of the risk.  The developer must stand to lose some serious dough if the project goes South.  The developer must have some skin in the game.

Okay, now let's go back to the goofy commercial construction loan request I cited at the very beginning of this training article.  You will recall that it was a $33 million apartment construction loan request.  Well, we know that the developer and his investors are probably going to be required to contribute 20% of the $33 million Total Cost; i.e., $6.6 million. 

Now the developer is buying the land for $2.7 million.  He has a term sheet for a $1.7 million new first mortgage, and on top of that, he wanted an $800,000 second mortgage.  In other words, he was only contributing a $200,000 downpayment on a $33 million project.  His Loan-to-Cost Ratio was 99.4%!  Somebody has been partaking of that Colorado medicinal tobacco.  Ha-ha!

Remember, most commercial construction lenders want the developer to bring the land to the deal free and clear, or at least pretty close to free and clear.  In most commercial construction deals, the land represents between 20% to 25% of the Total Cost, and that, along with architectural and engineering fees, is where most developers have spent their required equity.

Do you know a banker who is making commercial real estate loans?  We'll trade you the contents of one banker's business card for a list of 2,000 commercial real estate lenders.  We solicit these guys to refer their turndowns to C-Loans.


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Topics: commercial construction loans

Commercial Loans and Single Asset, Bankruptcy Remote Entities

Posted by George Blackburne on Thu, Dec 3, 2015

Bankruptcy.jpgThe vast majority of all large commercial real estate loans today are made to single asset, bankruptcy remote entities.  This article will explain why.

About 30 years ago a lowlife scumbag was climbing on the roof of a retail building in New York City, looking for a way to break in and steal some of the inventory.  The roof was old, and this poor-poor lowlife scumbag fell through the roof and was severely injured.  This lowlife scumbag then had the audacity to sue the property owner for $6 million for negligently having an older roof and not warning him of the danger of collapse.  The brain dead jury found for the the lowlife scumbag!

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The property was not sufficiently insured for this kind of personal injury, and the older couple who owned the building held title in their personal names.  The lowlife scumbag was therefore able to seize the life's savings of this honest, hard-working, older couple.

After this astounding case, most commercial real estate investors transferred title to their properties into some sort of entity that had a corporate shield, initially a Subchapter-S corporation and later, after the limited liability company was adopted by the states in 1978, an LLC.




However, it wasn't enough to have title vested in an entity with a corporate shield, as the following imaginary story will explain.

Peter Printer owned the world's largest illustrated Bible printing business in the world.  His Bibles contained scores of full color illustrations, far more pictures than his nearest competitor.  Customers loved his Bibles, especially parents who read the Bible to their young children at night.  For thirty years Peter Printer made a wonderful income, and he invested his millions into a series of office buildings in Los Angeles.  He held title to both his successful printing business and his latest office building (he sold his smaller buildings and traded up) in the name Peter Printer Enterprises, LLC.

In 2017 Amazon came out with the Kindle VII, which allowed book printers to embed numerous short videos right into their e-books.  Clever Printing, LLC was the first Bible printer to embed short videos, scenes culled from scores of old Biblical movies, into their Bibles.  Their new Bibles were a smash hit, and Peter Printer's Bible sales plummeted.  Suffering from immense losses, Peter was even forced to use the rents from his investment property, the big office building, to prop up his Bible printing business.  He stopped making payments on his $8 million first mortgage from Statewide Regional Bank.




When Statewide Regional Bank stopped receiving payments, it filed foreclosure.  Ten days before the foreclosure sale, Peter Printer Enterprises, LLC filed a Chapter 11 (Reorganization) Bankruptcy.  For sixty days, Statewide Regional Bank was not allowed by the automatic stay of bankruptcy to do anything; but when the sixty days had run, the bank immediately filed a motion for relief of stay or, in the alternative, for the immediate appointment of a receiver to collect the $75,000 in rent generated by the beautiful, big office building.

To the bank's absolute horror, Peter's bankruptcy attorney was able to convince the bankruptcy court that the $75,000 per month in rent generated by the big office building was absolutely essential to Peter's plan of reorganization.  The company needed that $75,000 per month to pay the salaries of the printing company's employees while the company developed its own video-embedded Bible.  

For three years the bankruptcy court forbade the bank from foreclosing, during which time the leases of 70% of the tenants came up for renewal.  With no money to pay for repairs and upgrades to the office suites and no money to pay for leasing commissions, a Biblical Exodus of tenants ensued.  By the time the bank was finally granted relief from the stay, the building was severely rundown and almost empty.  The bank had originally made an $8 million loan.  It lost all of its interest income and limped home with just $5.25 million of its original principal.

Are you learning anything today?  This is how I teach commercial real estate finance.  I try to use lots and lots of "real-life" stories.  In the 200-year history of the industry, this year is the single best year to becomes a commercial mortgage broker.  More commercial loans are ballooning this year than any year in history.


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What mistake did Statewide Regional Bank make?  They made a large commercial loan to an entity that that owned more than one asset.  They got caught up in the bankruptcy troubles of Peter's printing business.  The bank did not make a loan to a single asset, bankruptcy remote entity.  Had Peter, as a condition of the loan, transferred title to the large office building into a stand-alone LLC with no other assets, the troubles of Peter's printing business would not have delayed the bank's foreclosure.  The bank would not have taken a financial bath.


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It amazes me that more people don't take advantage of the following offer.  Give us the contact info of a banker making commercial loans, and we'll give you a list of 2,000+ commercial real estate lenders.  2,000+ for one.  Helloooo?


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Topics: Single Asset Entities